LEGAL: The ever-evolving rules of arbitration agreements – and implications for employers

By Jeff Jones
Special to the UCBJ

The Supreme Court recently issued two arbitration decisions of potential significance to employers. As background, the Federal Arbitration Act of 1925 (FAA) allows parties to agree to resolve their disputes through arbitration rather than taking action through the court system. While there are limits to compelling arbitration, the FAA generally requires courts to enforce private arbitration agreements, as illustrated by the following discussion.   

Employers may recall in recent years, the Supreme Court has shown a favorable approach to arbitration, as reflected in the 2018 decision of Epic Systems Corp. v. Lewis, where the Supreme Court upheld individualized arbitration agreements between an employer and its employees, finding neither the “savings clause” under the FAA, nor the National Labor Relations Act override that enforcement. Epic Systems Corp. v. Lewis, 138 S. Ct. 1612 (2018).  

On Jan. 8, 2019, the Supreme Court issued another pro-arbitration opinion in Schein et al. v. Archer and White Sales, Inc., 586 U.S. (2019). The Schein case arose from a contractual dispute between two parties wherein the Plaintiff, Henry Schein, alleged violations of federal and state antitrust law and sued Archer and White Sales, Inc. for money damages and injunctive relief. 

The contract between the parties provided for arbitration but Archer and White argued the dispute was not subject to arbitration because the complaint sought injunctive relief, which was an exception to the contractual arbitration provision. Schein argued the arbitrator, not a court, should decide whether the arbitration agreement applied. The District Court agreed with the Defendant and denied Schein’s motion to compel arbitration; the Fifth Circuit Court of Appeals affirmed. However, the United States Supreme Court reversed, holding that arbitration is a matter of contract and that courts must enforce arbitration contracts according to their terms with no ability to override the contract even if a court of law finds the arbitrability claim to be “wholly groundless.”  Thus, the Supreme Court ruled that the decision of arbitrability in this case rested with the arbitrator, not a court.  

In its second 2019 opinion regarding arbitration provisions, the Supreme Court ruling took a slightly different turn. In the case of New Prime Inc. v. Oliveira, 586 U.S. (2019), the Court determined that independent contractors who work in transportation, such as truck drivers, may not be forced into mandatory arbitration.  As an exception to its broad application, Section 1 of the FAA provides that “nothing herein…shall apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” Based on its interpretation of Section 1, the Court found in favor of Oliveira in this case, a truck driver who worked for New Prime under an operating agreement in which he was identified as an independent contractor.  The Court noted that when the FAA was originally written in 1925, it did not distinguish between employees and contractors, and thus the Court interpreted the exception under Section 1 to encompass independent contractors. The decision was considered a victory for employees because it enables individual contractors who work in transportation to avoid mandatory arbitration provisions. 

While the two cases may appear to be at odds, they are in fact distinguishable. Schein required the Court to interpret the contractual agreement between the parties, while New Prime called upon the Court to interpret and apply a statutory exception in the FAA itself.  Businesses in general, and particularly employers, often prefer arbitration over litigation in court because it tends to be faster and less expensive.  Cases such as these demonstrate how complex procedural issues can create disputes over arbitration provisions and thus, these cases illustrate the importance of ensuring well-crafted and enforceable arbitration provisions.

Jeffrey G. Jones is a regional managing member for Wimberly Lawson Wright Daves & Jones PLLC. He can be reached at jjones@wimberlylawson.com.

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